Benchmarking Retirement Plans With Alternative Investments

Posted by PlanFees on Oct 31, 2022 12:53:09 PM

Alternative investments are assets that don’t readily fit into traditional categories like stocks, mutual funds and bonds. Instead, they can include assets like real estate, cryptocurrency, hedge funds, venture capital, private equity and even physical commodities. Changes in underlying technologies or other market factors, such as cryptocurrency platform Ethereum’s recent “merge” update and transition to a more energy-efficient protocol, can have significant impacts on alternative investment valuations, expenses and performance over time.

The vast majority of 401(k) plans contain only traditional investment options. For example, fewer than 15% of current defined contribution plans offer real estate and private equity. But with retirement powerhouse Fidelity now including Bitcoin in its investment lineup, the number of plans that incorporate alternative assets could increase. Because these assets can affect a plan’s participant fees and servicing needs, it’s crucial to benchmark plans with alternative assets regularly.

Not All Alts Are Created Equal

Alternative assets don’t just differ from traditional assets — they can also differ from each other in significant ways, including how they might impact a plan now or in the future. Are there investment caps and other guardrails for high-risk assets? Are these funds available as part of the core lineup or in a brokerage window? Fees with some alternative assets may be less apparent — for example, potential cryptocurrency exchange fees if a plan adds this investment option through a self-directed brokerage window. PlanFees Prism Total Fees Benchmarking provides a quick checkup in two minutes, allowing advisors to easily benchmark fees annually or whenever circumstances dictate. If your Prism benchmark reveals higher than average fees, it may warrant further scrutiny.

In addition, some alternative assets, such as crypto, are less regulated than traditional investments and may be subject to increased regulation in the future. More frequent benchmarking for these plans could provide additional oversight to help protect investors and uphold the sponsor’s fiduciary responsibility.

An Alternative Future?

Alternative assets are still very much the minority in the defined-contribution space, but that may change as providers continue to explore their options. PlanFees can provide instant, detailed benchmarking reports about plans, including those that offer alternative investments to help advisors and sponsors make better decisions about their investment lineup.


Topics: Benchmarking